Gerry canned
EARNINGS UPDATE
Need To Know
- FY23 profit before tax guided to $670m +/- 5%, implies approximately -10% downgrade
- Net property revaluations for FY23 expected to be ~$119m
- HVN has too much inventory but is beginning to look cheap-ish in our view
The cost of living crunch is hurting all retailers and Harvey Norman has indicated its earnings will be lower this year. The company has carried too much inventory into the year. The share price is already reflecting a tough year but the risk of further downside is beginning to evaporate.
HVN’s FY23 pre AASB-16 profit before tax guidance, excluding net property revaluations, is now $670m +/-5%. This suggests the 2H23 PBT outcome is about $239m and franchising margins are slipping close to a cyclical low. Tactical support for franchisees will kick-in, leaving HVN shareholders to scrap over the crumbs in FY23.
HVN’s 1H23 inventory was almost $600m, much higher than usual, so the company has resorted to a heavy diet of promotional activity (EOFY sales, extended interest free periods etc) in order to rectify the situation. This will be at the expense of margins.
Investment View
At the February interim result, MD Gerry Harvey lamented the stock price reaction, claiming the market had got it wrong and the stock was worth “six to eight bucks”. He even suggested people should sell their house, boat and car to buy HVN shares, perhaps a little tongue in cheek. Part of Mr Harvey’s rationale was that the value of the property portfolio was worth $3.9bn or $3.90 per share. The book value as at 31 December 2022 was actually $3.55 and we expect it has fallen by perhaps 25% to around $2.70 per share. Historically, HVN has troughed at around 1.0x book value with its long term average at 1.5x.
HVN has been losing market share and together with the bloated inventory position could potentially see EBITDA for its franchisee segment fall by more than 20% in FY23f and FY24f, in our view.
Clearly the market has not been paying much attention to Mr Harvey’s remonstrations. The earnings guidance did not contain any sales update but directionally this will be down.
We have retained our Hold recommendation as the share price builds in a generous dollop of the bad news. HVN will report its full year result on 31 August which will provide a better view of the situation.
Stock Overview
Share Price
Company Overview
Harvey Norman is a furniture, consumer electronics and home appliances retailer. It has operations in Australia, New Zealand, Asia, Ireland, Slovenia and Croatia.
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